Auriant Mining is a Swedish junior gold mining company focused on Russia. The company has two producing mines (Tardan in Tyva and Solcocon in Zabaikalsky), one advanced exploration property (Kara-Beldyr in Tyva) and one early stage exploration property (Uzhunzhul in Khakassia).

Auriant Mining is a research client of Edison Investment Research Limited

In general, shortfalls in production and sales resulted in Auriant reporting a modest loss of $0.6m in Q419, relative to our prior expectation of a modest profit. Of much more importance however is the first meaningful production from the newly commissioned Tardan carbon-in-leach (CIL) plant, which produced 95kg of gold in December and 115kg in January, both of which (pro rata) exceed our expectations of 953kg of production for FY20. As a result, we have left our forecasts for the CIL plant in FY20 and beyond unchanged, while our valuation of Auriant has risen with the appreciation in its share price and depreciation of the rouble.

Auriant reported total cash costs for the year of $884/oz. While they were not formally disclosed for Q419, we estimate that cash expenses in the quarter amounted to $701/oz of non-alluvial gold produced. Including alluvial production, we calculate that Auriant’s cost of sales amounted to $720/oz of gold produced and $794/oz of gold sold. While these numbers are above our forecast of $627/oz of cash costs in FY20, they appear consistent with it, given that only 52.9% of Auriant’s production was derived from the CIL plant during the quarter. In addition, the cost of production from the residual heap leach operations may reasonably be assumed to have been above average and the cost of production from the newly commissioned CIL plant to be below it.

Valuation: $0.72 (SEK6.80) per share

On the basis that management executes the Tardan CIL project and the Kara-Beldyr project according to the operational and financial parameters expected, we estimate that Auriant is capable of generating average cash flows of $49.2m, average earnings of $42.2m and average EPS of $0.210 in the nine-year period from FY25–33 (inclusive), thus allowing it to pay maximum potential dividends to shareholders in the order of 23.0c per share in the period FY26–33 (inclusive). Discounted at Edison’s customary 10% discount rate, such a stream of dividends has a value of $0.72 per share (SEK6.80/share), rising to $1.28/share on the cusp of the company’s first meaningful dividend in FY27. However, in the event that the gold price remains at $1,600/oz indefinitely, our valuation of Auriant rises by 54.2%, from $0.72/share to $1.13/share, in which case an investment in Auriant shares at a price of SEK3.69 on 1 January 2020 would generate an internal rate of return to investors (IRR) of 26.6% in US dollar terms over the 16 years from 2020 to 2035 (inclusive).

Q419/FY19 results

Auriant’s Q419/FY19 financial results were reported within the context of known production (see Exhibit 1). Although output during the quarter was below expectations, some of the shortfall could be attributed to the Russian winter, which has always had the potential to have a material (and broadly unpredictable) effect on Q4 production. Of more significance, however, was the first meaningful production from the newly commissioned CIL plant at Tardan. After the requisite prior test-work, the plant began loading low-grade ore on 11 November 2019 and high-grade ore on 18 November. At that point, Auriant expected that the ramp-up phase of the plant would take 2.5 months, ie until the end of January. Although production in Q419 was lower than expected, the plant reached its stable projected processing capacity of 50t per working hour by the end of December, with the expectation that it would process 31kt in January and produce 115kg of gold (implying a plant feed grade of at least 3.7g/t and probably 4.0g/t). In the event, the plant processed 34kt in January and achieved its production target of 115kg of gold (implying a plant feed grade of at least 3.4g/t and probably 3.7g/t). Gold sales in January were 151kg however, including gold (presumably 36kg) that was produced but not sold in December – among other things, pointing to a strong Q120, albeit at the expense of Q419. The average realised gold price in January was $1,558/oz (a 5.2% premium over the estimated average price achieved in Q419 of $1,481/oz). We summarise Auriant’s FY19 and Q419 results in the exhibit below:

In general, the shortfalls in production and sales resulted in a negative variance in revenue of $3.4m in Q419 relative to our prior expectations, although this was offset to some extent by a $2.2m negative variance in costs. Coupled with increases in ‘other’ operating expenses (related to waste disposal fees accrued for previous periods) and the tax charge (which is always apt to be variable on a quarterly basis), this resulted in Auriant’s reporting a modest net loss for the period of $0.6m relative to our prior expectation of a modest profit of $2.4m.

Guidance

On an annualised basis, 115kg of gold produced in one month in January equates to yearly production of 1,380kg. This compares with our forecast for production in FY20 from the CIL plant of 953kg from an average 26.7kt processed per month at an average grade of 3.24g/t. Since February however, Auriant has been feeding blended high- and low-grade ore to the plant – as opposed to just high-grade ore only in January – in order to ensure a steady transition to year-round average grades. Auriant’s official guidance for 2020 is for production of 900–940kg gold, which compares with our 953kg from the Tardan CIL plant plus an estimated 62.5kg from Solcocon.

Ore to be fed to the new CIL plant will be mined from the Pravoberezhniy deposit, which was in operation throughout 2019. Management anticipates annual throughput of the CIL plant to amount to 350–380kt (cf our forecast of 320kt), which implies an average recovered grade in the range 2.37–2.69g/t and a likely plant feed grade therefore in the range 2.58–2.92g/t (cf our forecasts of 2.98g/t and 3.24g/t, respectively).

Operational considerations

Heap leach operations were discontinued at the end of December 2019 as expected with the result that 100% of Tardan production is now being derived from the newly commissioned CIL plant.

Costs

Auriant reported total cash costs for the year of $884/oz. While they were not formally disclosed for Q419, we estimate that cash expenses in the quarter amounted to $701/oz of non-alluvial gold produced. Including alluvial production, we calculate that Auriant’s cost of sales amounted to $720/oz of gold produced and $794/oz of gold sold. While these numbers are slightly above our forecast of $627/oz of cash costs in FY20, they appear consistent with it, given that only 52.9% of Auriant’s production during the quarter was derived from the CIL plant and the fact that it may be reasonably assumed that the cost of production from the residual heap leach operations was above average and the cost of production from the newly commissioned CIL plant was below it. Moreover, as a result of test-work conducted during the ramp-up phase, Auriant has upgraded the leaching tanks at Tardan in order to improve ore oxidation to ensure stable processing results. In addition, in December 2019, the company agreed a new energy deal to increase the power allocation to the Tardan CIL plant by 25% from 2.0MW to 2.5MW using a newly built 35kV power line. This will allow Auriant to minimise its use of diesel generators on site or, possibly, to cease their use entirely, with obvious benefits for the operation’s cost base.

Conclusion

While financial results for Q419 and FY19 were modestly below our expectations, more recent output and (implied) cost numbers have given us confidence to broadly maintain our forecasts for FY20, with the single exception that we do not now expect any residual contribution from the heap leach pads.

Valuation

In common with our standard practice, our valuation of Auriant has been performed via the discounting of maximum potential future dividends at a discount rate of 10%, assuming all excess cash generated is distributed to shareholders only after all debt has been repaid.

On the basis that management executes the Tardan CIL project and the Kara-Beldyr project according to the operational and financial parameters anticipated, we estimate that Auriant is capable of generating average cash flows of $49.2m (cf $48.5m previously), average earnings of $42.2m (cf $41.5m previously) and average EPS of 21.0c (cf 18.7c) in the nine-year period from FY25–33 (inclusive), thus allowing it to pay maximum potential dividends to shareholders in the order of 23.0c per share (cf 21.7c) in the period FY26–33 (inclusive). Discounted at our customary 10% discount rate, such a stream of dividends has a value of $0.72 per share (cf $0.68/share previously), as shown in the exhibit below, rising to $1.28/share (cf $1.20/share previously) on the cusp of the company’s first meaningful dividend in FY27:

Exhibit 2: Auriant forecast EPS and maximum potential DPS, FY15–35e

Source: Edison Investment Research

Our ‘base case’ valuation of $0.72/share compares with one of $0.68 in January 2020 (see our note Tardan CIL de-risks Kara-Beldyr). The main underlying factors occasioning the increase in value include 1) a higher share price (SEK3.69 vs SEK3.15), implying less future dilution associated with an assumed $40m equity raising in the near future (see ‘Sensitivities’ section, below); and 2) a slight 3.2% decline in the value of the Russian rouble relative to the US dollar, from RUB64.0188/US$ to RUB66.0750/US$. Note that our valuation specifically excludes any value attributable to Solcocon on account of the variable nature of alluvial mining operations. However, it is not impossible that activities at Solcocon could be reconfigured in the future to incorporate hard rock mining and processing via a carbon-in-pulp (CIP) plant.

Sensitivities

In qualitative terms, the principal risks to which Auriant is immediately exposed include geographical/sovereign risk (including regulatory risk), geological risk, metallurgical risk, engineering risk, funding risk, financing risk and management risk. In general terms, these may be summarised as execution risk ie management’s ability to bring the Kara-Beldyr project to account within its geographical jurisdiction at the required technical and economic parameters. Once in production however, these risks will be perceived to have reduced and other risks, such as commercial, commodity price, foreign exchange and global economic risks will become relatively more pronounced.

One specific risk – funding – bears further, immediate consideration from an empirical perspective. In this particular case, our valuation sensitivity to the price at which an assumed $40.0m equity funding is conducted is shown in the exhibit below:

Readers should note that (assuming conversion before FY26) the above table effectively also provides an analysis of Auriant being funded by way of a convertible bond (cf conventional equity) with a conversion price at one of those shown (typically at a premium to the existing share price cf equity at a discount) and a coupon close to the company’s cost of debt. In the event of such a convertible remaining unconverted, however, and therefore behaving like conventional debt, our valuation instead rises to $1.11/share (albeit with a correspondingly higher maximum debt level of $140.2m cf $89.8m in the ‘base case’ scenario, see ‘Financials’ section below).

Trading above $1,600/oz currently under the influence of both a re-expansion of the US total monetary base plus the perceived threat from the coronavirus, the price of gold is self-evidently above our forecast real prices for all of the years from CY20 onwards. In the event that the gold price were to remain at $1,600/oz, our valuation of Auriant rises by 54.2%, from $0.72/share to $1.13/share, in which case an investment in Auriant shares at a price of SEK3.69 on 1 January 2020 would generate an IRR to investors of 26.6% in US dollar terms over the 16 years to 2035 (inclusive), ie the life of operations.

Financials

As at end-December 2019, Auriant had net debt of $82.7m on its balance sheet, excluding a ‘lease payable’ item of $1.4m. This compares with net debt on its balance sheet of $83.4m as at end-September 2019. Assuming the company raises an additional SEK377.9m ($40.0m) in cash via equity funding in the near future, we expect its net debt will evolve as follows until FY25, before being eliminated in FY26:

This report has been commissioned by Auriant Mining and prepared and issued by Edison, in consideration of a fee payable by Auriant Mining. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

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General disclaimer and copyright

This report has been commissioned by Auriant Mining and prepared and issued by Edison, in consideration of a fee payable by Auriant Mining. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.